I work for a 100% ESOP company. Over the last 10 years, they on average have contributed 12% of my salary to my retirement account. I don't (and can't) match funds to it. The company places the 12% into private company stock in each employee's account. My question is as follows... many people seem to say savings should be 15-20% of income. Since I'm already getting 12%, should I just shoot for 3-8% more?

A little more info. The company stock has averaged 25% yearly growth over the last 10 years. The stock has a vesting schedule of 7 years, which I have reached. The stock cannot be sold, and you can't buy more. You have to retire or quit to get the money. You can't diversify until age 55.

I have a 401K too (they don't match it), but it's not nearly what my ESOP stock is. As you can tell, getting 12% contribution and growth of 25% per year has been very good. Even if growth "slows down to" 10%, I will still be in very good shape for retirement in 20-25 years.

Well Bear Sterns employees got about 10 cents on the dollar of what they had put in on the ESOP (relative to the price 12 months earlier) when JP Morgan bought them. They owned c. 25% of the company in total (ESOP and other methods).

Lehmans employees got ZERO. Yes ZERO on their stock.

This is not diversified wealth. I'd discount it in your wealth calculations by at least 50% over the market value of a comparable public company. That would be consistent with guideline practices for institutional investors eg on private equity investments in private companies. Another way would be just to treat it at book cost (conservative).

Until you have it in CASH or a diversified portfolio, it might have value but it's nothing like what liquid assets are worth.

If you stay with the company then you might retire quite rich. A lot can happen in 25 years: remember DEC? Kodak? Polaroid? All leading tech companies in their day. Nortel-- once the world's second largest telephone equipment maker? Bust. Enron? You probably do not remember how lauded Enron was in its day, and how employees were encouraged to buy stock. Even Microsoft, HP, Cisco-- share prices are not very different from where they were 12 years ago.

More prosaically US Steel was once the world's dominant steel company-- it sought Chapter 11. Pan Am airlines-- you might not be old enough to remember when that was probably the world's foremost airline brand? General Motors, the ultimate blue chip stock?

GE's share price is something less than half of what it was in 2000. The world's most succcessful industrial company, still one of its largest. From 1980 to 2000 all you had to do was own GE (my father did) and make money. Then, the world changed.

The one thing certain about corporate life, now, is the speed of change.

I think you have little choice but to make retirement savings on the basis that this *might* be the big win, but might not. I would say at least 10% into your retirement savings, and 15% would be ideal. The danger is you'll wind up retiring with far more money than you might need and/or not live long enough to enjoy it.

But I'd say you'd have to think about 10% in non company stock investments.

No reason not to maximize your 401(k) for the tax savings alone. If you are in the 28% tax bracket then the government is essentially giving you $4,900 back if you max out your 401(k) at $17,500. And then Roths are just a good vehicle to save money regardless of the purpose. Lots of people use them as an emergency fund (for real emergencies) as the contributions can be withdrawn without penalty.

Point is, even if everything goes perfectly for you there are still very good arguments for utilizing the other tax advantaged saving opportunities you have available.

I know I would not be able to sleep at night in your position. I would HATE HATE HATE having so little control over my economic future.

You should max out your 401k and Roth IRA if you can afford to do so, even if you're getting 12% annually from your company in company stock. Your job is already tied to the health of the company, don't let your retirement prospects be solely dependent on the company. If things go south you might find yourself out of a job and without much saved for retirement. As others have noted, employees at Bear Stearns and Lehman Brothers had a ton of money in company stock...until they didn't.

+1 all the above. My last employer was EDS from 1985-1996. During that period EDS stock rose almost astronomically, and I put a lot into my EDS SSP and 401K. When EDS was spun off from GM in ’96 predictions were for it to take off even faster. But instead it went into the toilet and except for a couple brief spurts stayed there. Fortunately I was diversified into other investments too. Otherwise it would have delayed my retirement date by many, many years. You don’t hear a lot about EDS now because it doesn’t exist anymore. It was purchased by HP and those who hung onto their EDS stock had it converted into HP stock. Would like to have all your retirement money tied up in HP stock? So don’t think just because your company s doing great now it will continue to do so for the next 20-25 years. Until you reach the point where you are able to either sell the stock or diversify out of it I would suggest an investment plan that assumes the worst case, namely that it’s value will be zero by the time you retire.

p.s. My employer before EDS was GM, a solid company for nearly a century. Fortunately I didn’t have any GM stock when its value went to zero.

Social Security was never intended to fully replace one's working income; it was to be one leg in a three-legged stool. The other two legs could be a company pension and personal savings.

Part of the reason so many retirees, or near-retirees, are in trouble is because that second leg (pensions) are becoming less common, and people aren't making up the difference in the third leg (personal savings), and many are hardly saving anything at all; these people are going to have to adapt to having only one leg of the stool and live with a restricted income in retirement compared to their working years.

Now, let's look at your own personal situation.

As for the first leg, I have to hope you can count on Social Security, but many cautious people say that those under 40-ish might want to forecast getting just ~75% of what you expect to get. I have no predictions there, but I would plan for a partly cloudy day instead of bright sunshine.

As for the second leg, the closest you have to a pension is this stock fund. This stock fund is obviously far, far more volatile than a conventional pension that would be invested in a balanced, diversified portfolio. I would be grateful for whatever I got from this stock fund, but owing to its huge risk, I would not risk my retirement income by counting on it.

As for the third leg, I would highly advise you to contribute to your 401(k) and IRAs. The rule of thumb about 10% - 15% of your savings should be independent of your pension, and given that your pension is highly shaky, I would try to do even more than 15%.

Thanks Valuethinker, you've given me a lot to think about. Part of me is hoping that my company is not like the others you mentioned. We are not a huge company, about 1500 employees and $1B annual revenue. We're 100% employee-owned, not publicly traded whatsoever. We're in the wholesale electrical distribution industry. So business can vary in the construction market, but our other large customers are utilities. Maybe I'm wrong in thinking we're not as volatile though.

You have me significantly worried though, so looks like I need to reconsider how much I'm putting into a 401K. You are right on about your comment on the speed of change.

Texasdiver, thanks for your input. I feel somewhat risk averse, so I know what you are saying about having little control over my economic future. I've grown to be ok with it though. Not just from complacency either. Being 100% employee owned has an interesting effect on the company culture. Most employees who have been around for a while understand this. We feel a strong sense of responsibility for our own destiny. Makes people care more than a normal company. Sounds cheesy probably, but it's true. People work harder to make sure we survive. Also we have an open book management culture, and we do more auditing of financials than we need to.

Another approach is that if our stock keeps doing well, just quit when my account reaches a number X, then I would get a distribution that I could roll over into a retirement account of my choice. Down side is I could leave a lot on the table, and have to quit a very good job.

Since that 12% contribution is in company stock, I would discount it dramatically. I would say it's wise to ignore it completely since you really can't count on it until you're able to cash out and diversify a bit. Stocks can drop to zero very, very quickly.

boondogger wrote:Another approach is that if our stock keeps doing well, just quit when my account reaches a number X, then I would get a distribution that I could roll over into a retirement account of my choice. Down side is I could leave a lot on the table, and have to quit a very good job.

I see two concerns with that approach:

1) What if the account never reaches x?2) Doesn't "just quit" assume you can find another comparable job with comparable salary and benefits? Try that in today's economy. Nobody knows what the economy might be like when you decide to "just quit".

One thing to that you might do is to plan the rest of your retirement savings so that you will have enough to retire at 55 if everything goes well. This would leave you time to recover if there is a problem with the company stock.

Basically it would be counting on the stock to eliminate final years of your retirement savings contributions, not the early years so you would want to save right now as if the stock did not exist.

We're 100% employee-owned, not publicly traded whatsoever.

That is another reason to greatly discount the value of the stock in your retirement planning.

One problem is the current growth rate of 25% will double the size of the company about every three years. That is not sustainable so eventually the growth rate will flatten out and the stock price may be hurt considerably.

boondogger wrote:We are not a huge company, about 1500 employees and $1B annual revenue. We're 100% employee-owned, not publicly traded whatsoever. We're in the wholesale electrical distribution industry. So business can vary in the construction market, but our other large customers are utilities. Maybe I'm wrong in thinking we're not as volatile though.

Smaller companies = higher riskMuch easier to go down in flames for reasons you cannot control.Don't put all your eggs in one basket. Don't have a non-diversified retirement investment portfolio.

A cautionary tale: my late (and then living/retired) father had over 50% of his retirement money invested in National City Bank stock (a midsize regional bank), which in 2007 ranked in the top 200 on Fortune 500, and top 10 in revenue among the U.S. commercial banks. Apparently, they had 140 billion in assets pre-crash. In the 2008/9 financial crisis, the company essentially went bankrupt and the stock became essentially worthless. This turned about 2 million dollars into chump change. **POOF** There went about 25+ years of savings in a matter of weeks.

boondogger wrote:We are not a huge company, about 1500 employees and $1B annual revenue. We're 100% employee-owned, not publicly traded whatsoever. We're in the wholesale electrical distribution industry. So business can vary in the construction market, but our other large customers are utilities. Maybe I'm wrong in thinking we're not as volatile though.

Smaller companies = higher riskMuch easier to go down in flames for reasons you cannot control.Don't put all your eggs in one basket. Don't have a non-diversified retirement investment portfolio.

A cautionary tale: my late (and then living/retired) father had over 50% of his retirement money invested in National City Bank stock (a midsize regional bank), which in 2007 ranked in the top 200 on Fortune 500, and top 10 in revenue among the U.S. commercial banks. Apparently, they had 140 billion in assets pre-crash. In the 2008/9 financial crisis, the company essentially went bankrupt and the stock became essentially worthless. This turned about 2 million dollars into chump change. **POOF** There went about 25+ years of savings in a matter of weeks.

So, if you think your company is safe, you are fooling yourself.

Another thing about small private companies… If they are good they grow. Some may eventually go public. If they don’t grow they usually perish. It is impossible to manage large companies using small company processes so as they grow bureaucracies develop. The bigger they become the more layers of bureaucracy are added. As a company becomes more successful it usually becomes more complacent, both at the management and worker levels. Eventually smaller, more competitive and innovative companies begin undercutting its business. Some may be able to adapt to the new competition. Example: IBM was on the robes in the mid-80s but was able to reinvent itself and prosper again. Some won’t or can’t adapt and fail. Example: General Motors. I don’t know which path OP’s company will take, but I can guarantee it won’t be like the company it is today.

cheese_breath wrote:Another thing about small private companies… If they are good they grow. Some may eventually go public. If they don’t grow they usually perish. It is impossible to manage large companies using small company processes so as they grow bureaucracies develop. The bigger they become the more layers of bureaucracy are added. As a company becomes more successful it usually becomes more complacent, both at the management and worker levels.

Completely agree. You might strike it rich... But any small, mid, or large-size company can go under--- and then you lose everything.

It is about diversification and risk. I would not place the bulk of my retirement assets in the single stock of any company, big or small.

I would create a diversified retirement investment approach outside the company stock plan. As others have suggested, if you later cash this out the company stock and diversify this investment, you can always scale back contributions or retire early. But you're not left with nothing.

boondogger wrote:Thanks Valuethinker, you've given me a lot to think about. Part of me is hoping that my company is not like the others you mentioned. We are not a huge company, about 1500 employees and $1B annual revenue. We're 100% employee-owned, not publicly traded whatsoever. We're in the wholesale electrical distribution industry. So business can vary in the construction market, but our other large customers are utilities. Maybe I'm wrong in thinking we're not as volatile though.

You have me significantly worried though, so looks like I need to reconsider how much I'm putting into a 401K. You are right on about your comment on the speed of change.

If you watch the Enron movie 'Smartest Guys in the Room' there's a utility lineman. 25 years putting money into his employer's stock-- Oregon electric utility. Safest thing in the world. Then Enron took it over, stock for stock, and 2 years later it was bust-- he lost all his retirement savings.

I would agree with you that your business sounds a lot safer than Apple, say. You are not technology dependent, your customers are not going to go away.

But so much can change:

- company is taken over by next Enron (or just your typical change strategy every 2 years corporate)- major customer gets into financial trouble- some 'bright light' in the company does something stupid eg some derivative swap sold by a banker, company gets wiped out when it goes wrong- culture changes and company does not remain competitive in its industry- new entrant with big financial backing drives down prices for everyone, industry incumbents get really hurt

This is the problem. Good companies don't always stay good companies.

I don't encourage you to leave a job you like with a good working environment. These are so rare nowadays-- most folks are basically working at jobs they don't like, unreasonable hours, ridiculous management demands, because they are terrified of losing their jobs, their health coverage etc.

However I do encourage you to plan for the downside risk.

Texasdiver, thanks for your input. I feel somewhat risk averse, so I know what you are saying about having little control over my economic future. I've grown to be ok with it though. Not just from complacency either. Being 100% employee owned has an interesting effect on the company culture. Most employees who have been around for a while understand this. We feel a strong sense of responsibility for our own destiny. Makes people care more than a normal company. Sounds cheesy probably, but it's true. People work harder to make sure we survive. Also we have an open book management culture, and we do more auditing of financials than we need to.

All to the good all arguments to stay there. Just don't bet the whole ranch on the stock.

Another approach is that if our stock keeps doing well, just quit when my account reaches a number X, then I would get a distribution that I could roll over into a retirement account of my choice. Down side is I could leave a lot on the table, and have to quit a very good job.

Don't leave a good job. Just don't. They are too hard to find in life, particularly once you are over 45.

Not addressing the company stock issue (I agree with previous posters, by the way) but to address what the original question was supposed to be...

The "saving 15%" has two aspects, from what I've always understood. There is the 15% that you are saving, but also there is the fact that you are learning to live on a salary that is 15% smaller. So even if your company were giving you 12% of your salary in actual money, you should still be trying to save an additional 15% (or so) on top of that, not just 3%.

But at this point, the fact that nearly 100% of your retirement savings are in one single company, and it's the company for which you work is the biggest issue you have going forward.

boondogger wrote:Lot's of good responses. Sounds like most are on the same page.

Well, I already increased my 401K contribution by 10%. The examples given scared me into doing something right away

Good for you. You won't regret it. You might think about bumping it another percent or two with each raise you get until you reach the max allowable. You won't miss a percent or two now, but it will make a big difference when you retire.

However most of us have been in a situation where a 'sure thing' turned out not to be.

Probably in 15 years time, if you stay with this company, it sounds appropriately conservatively managed, you'll sit back and be in a really good position and think 'those guys were fear mongering'.

But our concern is it might not.

You want to be sure that if, say, you only got the money back you had put in (no interest) you'd still be OK in retirement. Maybe not as wealthy as you once were, but not sitting there at 59 with health issues thinking 'I have got to work until I am 67 to be able to eat and pay the heat and electricity in retirement'.

Life is long and companies change. I would say if you are doing work you mostly enjoy, in a good corporate environment and culture, that's pretty precious. Because most of us have experience of lousy jobs and toxic cultures, and in this economic and corporate environment, where everything is done for the very short term, constant change, new initiatives, endless cost cutting (which really means sacking people, and the remaining people do all the work the people who left did as well as their own), corporate politics....

well in this environment lousy jobs and toxic cultures are more the norm. And because it's hard to find a new job, particularly over 45-50, most of us just have to take it and lump it (I am not in a bad position, but after 3 rounds of layoffs, there's not a lot left between my desk and the way out the door).

So in this difficult environment I always counsel 'grass is always greener' and encourage people to stick with jobs they like. It's not a given in this world you get to do work you like with people who are OK to work with, in an organization that is non toxic.

However financially you have to prepare for the day that the company might change and you might not be as happy. Change is the only certainty and constant, now.

10% outside the ESOP is probably a good baseline, and look to bump it up by say 1% (by banking some of a raise, as OP mentioned) until you get to 13-15%.

15% is a worthy goal. In fact, it's my goal, too. I'm not sure if the concept includes employer matching, although every little bit helps, right? I vaguely remember The Boglehead's Guide suggesting 20%. But beyond that, I think the thrust of the idea is more like: "Save as much as you can as soon as you can for as long as you can."

If you can save more than 15% and enjoy your life, do it. Nothing says you shouldn't save up to the 401k max and IRA max, if you can, whether that would be 4% or 40% of earnings.